Eureka Correspondence

Bond options for retail investors, W-8BEN forms, behind stock picking recommendations, and more.

Bond options for retail investors

I am considering purchasing bonds for my SMSF and have read with interest articles by Elizabeth Moran and Rosemary Steinfort.

From my understanding the only bond market available in the Australian market is by over-the-counter (OTC). The bonds available in this sphere appear to be mainly wholesale bonds which have been split into smaller amounts for retail investors.

Financial advisors appear to be reluctant to recommend purchase of these because of what they perceive as a lack of market for a seller.

Could you please advise what the depth of this market is for a seller and how liquid it is?

Ian Graves

Rosemary Steinfort’s response: Buying bonds as a retail investor can be more difficult than buying shares due to liquidity and buy/sell spreads. There are some bonds listed on the ASX which offer more transparency with respect to liquidity and pricing – predominantly government bonds, floating-rate notes, and hybrids or preference shares which sit between bonds and shares.

The costs of buying bonds through a broker are impacted by the liquidity of the bond – so less liquidity means a larger spread between the bid and offer price. According to FIIG, the OTC is a very liquid market. FIIG through its own network facilitates over 2,000 bond trades per month valued at just under $1 billion.

Another option is to buy an exchange traded fund (ETF) that invest in bonds. Some ETFs offer broad bond market exposure to investment-grade fixed income securities issued by Australian Treasury, state governments and corporations with the benchmark being the UBS Composite Bond Index. Other ETFs are more concentrated, focusing on segments of the bond market. I wrote about bond ETFs in New indexing: strategies for bond ETF investors.

Filling in the W-8BEN form

A recent article on investing overseas (see Buying overseas stocks: A Eureka guide), including in the US, mentioned that a W-8BEN form would need to be completed to avoid paying withholding tax on investments in the States. This form is not easy to complete, given different terminology and practices. Any assistance from the Eureka team by way of clarifying these sections would be welcome. For your background, I sold my investment to avoid completing and signing the form as the institution through which I had placed the investment was surprisingly not in a position to provide advice on how to complete it. Please advise if you are able to assist. I'm sure there are many of your readers who would be in the same boat.


Editor’s response: Thanks for your letter. Comprehensive instructions on how to complete the W-8BEN form are provided by the Internal Revenue Service (IRS). You can find all of the relevant forms here and the instructions here.

Behind stock picking recommendations

Hi Alan, I like the idea of specific share recommendations from Eureka. I have more credence in your recommendations than most because you are not in the share selling business. As an aside, in another life I looked at joining a broker, but when I heard the 7.00am meeting starts out with what has to be sold that day, I thought, “That sounds like giving financial advice!”, so I desisted. Guess I'm just not that type.

I listened to your interview on your own portfolio (see Kohler’s portfolio review). My take-out on that was that you have a lot of money and can therefore go for a spread of higher risk/growth than most. I don't know of your other staff portfolios, but maybe it would be good if you could provide a recommendation (blind if you like) on shares in your combined portfolios. Mesoblast is one example.

I usually bet against the Australian dollar. I did so by buying shares that would benefit from a fall such as BHP, Rio Tinto, Woodside Petroleum and QBE Insurance, but as you would be aware that strategy hasn't worked out so well yet. Nevertheless I will hold on.

At the same time I have picked up on your points about overseas markets and growth, so I have the listed trusts like Platinum Asset Management and Templeton Global Growth Fund plus health care stocks in review, hence my interest in your recommendations.

Thanks for Eureka. I don't expect gems every day, but I appreciate your overall thoughtfulness.

John Clark

Editor’s response: Thanks for your letter. Because Eureka Report goes through an in-depth process behind its stock recommendations under our Australian Financial Services licence, including modelling and peer reviews, we cannot blindly place calls on stocks. Our model portfolios aim to bring you transparency from our commentators.

Outside interest in AMA

In his article on AMA Group, Brendon Lau did not mention Thorney Opportunities (TOP) recently acquired a 6.3% stake in AMA. Our SMSF is a TOP shareholder and in its chairman's update referred to AMA's growth prospects and strong management team.

Vince Mahon

Editor’s response: While Brendon didn’t mention this in his analysis of AMA Group, Alan Kohler has interviewed Alex Waislitz in his weekend briefing recently, where he highlighted four stocks that TOP has invested in – including AMA.

The Future Fund’s returns

Please advise if the results for the Future Fund in Scott Francis’s recent article is referring to yield only or the total return? If Scott is referring to the total return, the Future Fund's results do not seem good compared to what most of us achieved.


Editor’s response: The Future Fund’s aim is to set a target return above the rate of inflation in the long term with a thoughtful approach to asset allocation. Over the past five years the fund has returned 10.9% per annum. This means investors overweight in the ‘big four’ banks, for example, would have outperformed the Future Fund in more recent years. But they may have also been exposed to more risk and market volatility.

Ethical investing opportunities

I have written briefly to you previously requesting a bit more coverage of so-called ethical investment opportunities, particularly those relating to negative screening. What investment opportunities are there? I know about Hunter Hall (even invested in it a few years ago) but there must be more now, including ETFs on the ASX and elsewhere?

Mark Lewis

Editor’s response: None of the 96 Australian ETFs apply an ethical screen – though you would be more than likely able to find one overseas. Part of the reason why this is the case is that ethical screening isn’t a standardised approach (some companies may find nuclear energy to be ethical, for example) from which you can build an index that low-costs ETFs like to follow. Potential ethical investments in our local market can be through Australian Ethical Investment (AEF) (see article), which is the only ethical fund in the country to apply a positive screen to its holdings, and various fund managers like Hunter Hall and Perpetual.

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